BRITISH DEBTS. At the time of the American Revolution (1775–1783), merchants and planters in the thirteen colonies owed British creditors some £5 million. Virginia planters held the greatest portion, owing £2.3 million. Overall, retail credit constituted the bulk of the debt. As a result, the matter involved many small claims in amounts of less than £500, and hundreds of creditors and debtors. During the revolution, payment on these debts all but ceased. From the creditors' point of view, interest on the debts nevertheless continued to accumulate. Resolution of the principal and interest on these debts was a key issue in the 1782 negotiations that led to the Treaty of Paris (1783), and remained a protracted issue of foreign relations until a convention in 1802 settled the matter.
These private debts were part of a general indebtedness accumulated by the colonies and individuals under the British imperial system. Colonial borrowing from 1703 to 1775 for the purposes of generating revenue for current expenses, establishing loan funds, and injecting paper money into the economy created substantial debts that were denominated in local currencies, rather than specie. That is, colonial money was not convertible into sterling. Colonial governments retired their debts through inflation, benefiting holders of private debts and harming their creditors. British merchants, officials, and other lenders constituted the chief losers. American debtors, principally farmers, planters, and politically connected individuals, profited. They remained interested in low taxes and new money issues. Thus the fiscal and monetary practices of individual colonies helped to create a class and political consciousness among colonists.
During the American Revolution, all of the newly declared states enacted laws that impaired the position of creditors. Some laws confiscated the property of Loyalists, which adversely affected any credits the latter held. Others sequestered the debts, paying them into respective state treasuries. Still others barred or restricted the ability of creditors and their representatives to collect debts.
The Treaty of Paris
Debts emerged as a prominent issue in the negotiation of the Treaty of Paris. Once the British government abandoned hope of reunion with America, it was interested in making a generous peace with a truly independent nation, that is, one not linked or dominated by another European power. To this end, the British cabinet initially adopted a lax position on both impaired debts and the confiscated property of Loyalists. The government counted on international norms and opinion to persuade America to make a just debt settlement, and therefore gave its negotiator ample leeway on the issue. For their part, neither John Jay nor Benjamin Franklin, the American negotiators, were interested in making debts part of a settlement. Indeed, the initial draft of the treaty, which Jay offered, made no mention of debts.
Persuaded by creditors and other interests, the British cabinet rejected Jay's draft and insisted that the Americans address debt collection and other economic issues. The elevation of these issues to matters of top priority threatened to derail the negotiations. However, John Adams, who joined Jay and Franklin in October, argued—without consulting his colleagues—for the inclusion of debts, stating in the course of negotiations: "I have no notion of cheating anybody." Article Four of the treaty provided that Congress would see to it that the states open their courts to the recovery of bona fide debts.
Soon after America and Britain ratified the Treaty of Paris the states resumed their harassment of creditors. Their tactics included closing their courts to debt cases, denying admission to creditors and their agents, disallowing the accumulation of interest during the war, and terminating debts. The states also failed to restore the confiscated property of Loyalists, as Article Five of the treaty prescribed. The British responded by keeping their troops at their posts to the north and west of the thirteen states, encouraging Native American tribes to attack settlers, refusing to move forward with a trade treaty, and seizing American merchant vessels. The British government justified its actions on the grounds that America was failing to uphold the 1783 treaty. After 1787, however, this claim constituted little more than an excuse. Once the U.S. constitution established a Supreme Court and declared treaties to be the law of the land, federal courts began to adjudicate debt cases in accordance with the Treaty of Paris. Nonetheless, the deterioration of relations was especially acute from 1792 to 1793, which prompted the negotiation of Jay's Treaty. For the purposes of avoiding war and improving commercial relations, the treaty addressed the collection of private debts.
As chief justice of a Supreme Court that upheld the Treaty of Paris and the leading American negotiator with the British, Jay was eager to resolve the debt issue. Article Six of Jay's Treaty, which Congress narrowly ratified in 1795, provided for the recovery of debts "with interest thereupon from the time of being contracted." The treaty also provided for the arbitration of debt disputes. Stripping the U.S. Supreme Court of its jurisdiction, Jay's Treaty set up a joint, five-person commission to hear the appeals of creditors from American courts. The British and U.S. governments each selected two delegates, and a fifth commissioner was chosen by lot.
The commission, which sat in Philadelphia from May 1797 through July 1799, did not resolve the debt issue. It adopted, by a three-to-two margin, the British position on such matters as jurisdiction, the nature of legal impediments, the solvency of debtors, and amounts of wartime interest. The two American commissioners eventually resigned from the body. As a result, the debt issue again became a matter of bilateral foreign relations.
In January 1802, the Jefferson administration agreed to pay the British government £600,000 to settle outstanding British claims. The paltriness of the amount, much less than U.S. liability under Jay's Treaty, reflected the lack of documentation for many debts and the recognition of only those debts that amounted to £500 or more. On receiving this payment, the British government established a commission to assess the claims of creditors. It sanctioned about one quarter of the claims it heard and paid out on about 45 percent of the approved claims.
Bemis, Samuel Flagg. Jay's Treaty: A Study in Commerce and Diplomacy. 2d. ed. New Haven, Conn.: Yale University Press, 1962. A detailed political and legal analysis of the treaty. The original edition was published in 1923.
Hoffman, Ronald, and Peter J. Albert, eds. Peace and the Peacemakers: The Treaty of 1783. Charlottesville: University Press of Virginia for the U.S. Capitol Historical Society, 1985. Several essays discuss debts within the context of treaty negotiations.
Moore, John Bassett, ed. International Adjudications, Ancient and Modern. Volume 3. Reprint, Buffalo, N.Y.: W. S. Hein, 1996. A thorough legal study of the topic, with documents. The original edition was published in 1931.
Nash, Gary B. The Urban Crucible: The Northern Seaports and the Origins of the American Revolution. Abridged ed. Cambridge, Mass.: Harvard University Press, 1986. Puts debts into economic, social, and political context.
Ratchford, B. U. American State Debts. Durham, N.C.: Duke University Press, 1941. Provides a valuable survey of the public finance practices of colonial governments.
See alsoParis, Treaty of (1783) .